Six Things to Know About the Economic Outlook for the Caucasus and Central Asia

IMF News, May 4, 2017

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Growth in the Caucasus and Central Asia is expected to pick up this year to 3.1 percent from 2.4 percent in 2016 as the external environment improves—firmer growth in Russia, an upgraded outlook for China, and a partial recovery in commodity prices.
After a disappointing 2016, growth is expected to be 3.1 percent in 2017 and 4.1 percent in 2018.
The IMF’s Regional Economic Outlook for the Middle East and Central Asia was officially launched on May 2 in Dubai and May 4 in Almaty.

Fiscal support and currency adjustment helped mitigate some of the impact of external shocks:
- Increases in public expenditure supported domestic demand.
- Exchange rate depreciations and increased exchange rate flexibility partly compensated for fiscal and external losses from lower commodity prices and slower remittances.
- Depreciations helped maintain the value of external and fiscal revenues in local currency and made exports somewhat more attractive.
These actions have left the region more vulnerable—with higher deficits and debt:
- Increased public spending led to wider fiscal deficits—especially among oil importers, like the Kyrgyz Republic—reducing policy space for future shocks.
- Public debt, while still low relative to international standards, increased in many countries, and further debt accumulation is anticipated over the next few years.
- Almost half of the increase in public debt since 2014 resulted from valuation changes because a large share of public debt is denominated in foreign currency.

Fiscal consolidation is needed and should include both spending and revenue measures:
- Countries have taken steps to cut public investment, sometimes appropriately reversing past investment booms that generated little improvement in productivity or growth.
- Strengthen the efficiency of public spending and preserve critical social spending that protects the vulnerable.
- Identify new sources of revenues to lessen dependence on commodities.

The economic slowdown and exchange rate depreciation hit heavily dollarized financial sectors hard:
- Restructured and overdue loans increased.
- Borrowing costs in foreign currency rose.
- Credit contracted, and banks lost reserves.
To tackle financial sector issues, the report recommends:
- Identify bad loans and capital needs.
- Provide support to troubled banks under strict conditions.
- Liquidate bad assets and be open to fresh capital transparently and in ways that promote competition.
- Strengthen crisis management and resolution frameworks and fully enforce regulation.
Quoted guidance: "Capital and investment flows can be the lifeblood of an economy, and so it is important that the countries in the region take decisive steps toward rectifying their financial sector weaknesses,” said Jihad Azour, the Director of the IMF’s Middle East and Central Asia Department.

Medium-term growth is expected to remain below the historical average due to:
- A still relatively subdued external outlook.
- Domestic growth impediments—weak financial sectors and lack of diversification amid inefficient business environments.
Structural reforms recommended:
- Diversify away from oil and other commodities.
- Reduce reliance on remittances.
- Implement reforms such as the 100 Concrete Steps in Kazakhstan and the Four Point Reform Plan in Georgia to build resilience against external shocks.
Risk noted: Improving external conditions could lead to delays in reform implementation, potentially impeding further gains in living standards.

IMF News — Six Things to Know About the Economic Outlook for the Caucasus and Central Asia